A Japanese Conundrum!
By Mike Conlon | August 31, 2010
In the overnight markets, the Nikkei average fell some 3.6% to close at its lowest level in more than a year. This came as a result of the emergency Japanese monetary policy meeting that failed to produce measures that would cause Yen weakening. There has been much speculation over intervention in the currency, which hasn’t been done since 2004.
Part of the reason why intervention seems so daunting a task is that the Japanese may not have enough monetary muscle to intervene in the currency and the recent lessons learned from the Swiss attempt to intervene (which resulted in big losses) may be fresh in their mind.
But today I’m going to bring up an alternative idea, one that I haven’t heard discussed very often. What if Yen appreciation turned out to be a good thing for Japan? Now before you parrot the usual rhetoric about Japan being an export-based economy and a strong currency makes their exports less competitive (both true statements), maybe it’s time for a policy shift.
Japan has been mired in the “Lost Decade” with rampant deflation which has left the economy floundering for some time. There have been periods where there has been a weak Yen, yet the same condition persisted. Part of the problem in Japan is that there is very little domestic demand, as its citizens’ savings rates are among the highest in the world. Unemployment is surprisingly low (5.2%) given the economic conditions, yet the consumer spending is not there.
What if a stronger Yen encouraged Japanese business to out-source some its labor to lesser developed countries to maintain corporate profitability? This would undoubtedly cause higher unemployment in Japan, but could spark further innovation and new industry which could potentially take care of the employment gap. With ridiculously low interest rates, start up businesses could have a leg up in the global economy by being able to borrow more cheaply.
This could also encourage spending by Japanese consumers, as their new found “wealth” allows them to buy goods and services more cheaply. With stronger Yen chasing more goods and services, this could actually help cause inflation which would be a welcome condition.
While the outsourcing of labor has clearly been one of the issues that has plagued the US, the Japanese could use the lessons from the errors made here in the US to create policies that will help them reduce deficits and maintain growth. An overhaul of tax policy to encourage spending could restore economic balance and make Japan’s economy less reliant on other world economies ability to consume.
For if the rest of the sensible world is pursuing austerity measures to reduce deficits (and the only non-sensible one, the US, is forced to reluctantly change its spending habits), then the Japanese economy would be able to better withstand threats to its economy by having domestic demand return.
Because what it is certain is that the policies of the past have not helped the Japanese economy improve. Maybe it is time for some new thinking. While these changes wouldn’t happen overnight, the shift in sentiment could be seen as a step in the right direction.
Or they could maintain current policy which invariably will lead to currency intervention, which could be too much for them to handle alone. While they may be looking for “coordinated action”, no other economy is going to willingly contribute to weaken the Yen at the expense of their own currency. Particularly the US. And China.
This could induce major losses contributing to further debt and hastening the pace that the Yen strengthens, in direct opposition to their intentions.
If they want the Yen to weaken, I would advise them to say the opposite. “A strong Yen is desirable by the Japanese economy as we are shifting economic policy to encourage domestic demand and spending.”
Then watch the massive sell-off begin!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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What’s Ahead for the Fed?
By Mike Conlon | August 10, 2010
All eyes today are going to be glued on the FOMC policy meeting today where the Fed is expected to keep rates at .25% for an “extended period”. However, more attention will be paid to the policy statement which is expected to show concern about a decline in the economy.
There is an expectation in the marketplace that the Fed will announce that they are going to reinvest proceeds from mortgage bond holdings into new securities. Further asset purchase plans could also be announced, which would be further quantitative easing designed to stimulate the US economy.
Thus there is discrepancy in the market as to whether or not this would be received as positive or negative for the Dollar. The market is starting the morning in risk-aversion mode, with Dollar strength across the board. Further quantitative easing has been dubbed as “QE2”, could send the markets higher and increase risk appetite as the prevailing thought is that looser money will make its way into other areas of the economy. However, this would also signal that economic recovery is very fragile, which would be seen as a negative and could induce further risk aversion.
One of the problems seen in the US economy is a lack of demand, so there is some concern that monetary easing may not be enough to combat the problem. The idea is that if money is cheap enough people will want to borrow, and potentially use that money to fund major asset purchases (such as housing). However, consumer psychology is very fragile as concerns about employment have trumped the desire to spend. All of the easing in the world won’t fix this situation. So if the Fed does ease further, look for stocks and commodities to move higher, as home prices and other assets continue to fall.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion. Business confidence figures came in at a 1-year low. Tomorrow Australia reports consumer confidence figures and on Thursday unemployment figures. There is also concern in the market about a potential Chinese slowdown, as the Chinese reported lower exports and slower property price gains. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is also lower for many of the same reasons as the Aussie, but slightly more so because the NZ economy is not as robust as Australia.
Loonie (CAD): The Loonie is also lower as oil prices have slipped back to the 80 mark on signs that the global economy is slowing. In addition, the new housing price index came in slightly lower and housing starts fell to a 7-month low, though slightly better than expectations.
Euro (EUR): The Euro is mixed this morning trading higher against the Pound and risk currencies. CPI figures in Germany came in as expected, though French industrial production and manufacturing figures were lower.
Pound (GBP): The pound is lower as a UK housing gauge showed its first price drop in a year as demand for housing weakened. This comes ahead of the BOE inflation report due out tomorrow, which would support the idea that inflation is going to fall back to the target range, which could reduce the likelihood of a return to normalized monetary policy. (Click chart to enlarge)
Dollar (USD): Dollar strength this morning is coming about for two reasons: risk aversion prior to the FOMC statement, and because the market has actually reduced speculation about quantitative easing. There is one thing we can be certain of; that there will be major volatility surrounding the statement, which is due out at 2:15 EST.
Yen (JPY): Then is showing strength today as both risk aversion and a lower Nikkei has increased demand. In addition, the Bank of Japan left interest rates unchanged and the government assessment of the economy was that it was improving despite a higher Yen. As a result, speculation over monetary easing or intervention has lessened. (Click chart to enlarge)
Today could be a very important day for both the US and global economy as the results of the FOMC could set the course for future growth going forward. Part of the fear in the market is that we are facing deflation; and Bernanke the student of the Great Depression is going to do everything he can to try to combat it.
The problem is, all the easing in the world may not encourage demand if people are fearful about the path the US economy is on. Many consider this to be “Japan 2.0”. The Japanese have been battling deflation for years and all of the money that they pumped into their banking system never made it out the door as there was little demand and no confidence to spend.
There is going to be MAJOR volatility surrounding the Fed announcement, so traders should be careful and wait for the dust to settle before getting into position. I personally will be out of the market until after the decision, as I prefer to see what is going to happen rather than try to guess.
My advice is that you should do the same.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Record Low Rates Persist!
By Mike Conlon | August 5, 2010
Earlier this morning, both the ECB and the BOE left interest rates unchanged. While this move was largely anticipated, comments from the ECB show that economic progress is being made; evidenced by better than expected factory orders in Germany.
Here in the US, Initial Jobless Claims came in at 479K vs. an expectation of 455K showing signs that the employment picture is still weak and worsening. Tomorrow’s Non Farm Payrolls Report will be the rubber match and the ultimate decider of economic condition of the US.
Speaking of bad employment figures, last night New Zealand reported a worse than expected unemployment rate, sending the Kiwi lower as the worst performer this morning.
So this morning is a bit of a mixed bag, with fundamental data driving the marketplace more so than risk themes. There is significant US dollar weakness, yet Canadian dollar strength. The Japanese yen is also showing strength, as is the Euro.
In the forex market:
Aussie (AUD): The Aussie is lower this morning on a lack of risk appetite as its neighbor NZ reported dreadful employment figures.
Kiwi (NZD): The Kiwi is the worst performer this morning as worse than expected jobless figures have soured speculation that further rate hikes may be forthcoming. The unemployment rate went up to 6.8% vs. an expectation of 6.2%, showing signs that the economy in NZ may be cooling. (click chart to enlarge)
Loonie (CAD): The Loonie is surprisingly strong this morning as risk appetite has diminished and oil prices have fallen back to around $82. However, building permits advanced to 6.5% vs. an expectation of a 1.8% gain, reflecting a more positive outlook. Loonie strength this morning is most probably money flowing from the Kiwi as a future NZ rate hike is all but off of the table.
Euro (EUR): The Euro is mostly higher after the ECB left rates unchanged. However, positive comments from ECB President Trichet have increased demand for the Euro, as has anti-Dollar sentiment.
Pound (GBP): The Pound is now lower across the board as more traditional risk aversion is creeping its way into the market this morning. The BOE left rates and its asset purchase program unchanged, and there is increasing speculation that a rate hike may be coming sooner than later.
Dollar (USD): The Dollar is weaker this morning on the heels of the Initial Jobless Claims report which showed an increase of 479K vs. an expectation of 455K, which is a 3-month high. Tomorrow’s NFP report is expected to show a loss of 65K jobs, and the unemployment rate is expected to tick higher to 9.6%. Worse than expected figures could send the market into major risk aversion going into the weekend. The Dollar is gaining strength though as risk themes come further into focus.
Yen (JPY): The Yen is stronger this morning as the market slips into a more traditional risk aversion mode. There is major concern about possible intervention in the currency should it continue to strengthen, however Finance Minister Noda has shunned such discussion. (click chart to enlarge)
The employment picture in the US looks bad and there is no sign that it is getting better. Current economic uncertainty over government policy has left businesses content to do more with less. This is unfortunate as there are many able-bodied and willing workers out there who are victims of big government ideology.
Future tax hikes, regulation, costs, and general anti-business climate have caused many Americans to realize their greatest fear, that they may have to rely on the government to get by.
Meanwhile, countries around the globe have decided to take their medicine and cut back on spending, thereby reducing the uncertainty over the business climate and actually encouraging economic progress.
Just a few months ago, everyone was calling for the Euro to collapse and now the economic prospects look (dare I say it) better than those of the US. The marketplace is sending a loud and clear message which is backed up by the data that currently the US is in danger of going over the cliff.
If we continue to let this happen, then we have no one to blame but ourselves. So keep an eye out for tomorrow’s NFP which is sure to be a market-mover. Remember that volatility is a trader’s friend but be sure to remember to trade what you see and not what you think will happen.
In other words, don’t guess. React.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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“Slowing” Growth!
By Mike Conlon | July 15, 2010
Overnight, the Chinese reported less than expected GDP figures; however before you worry about the Chinese economy, note that growth slowed to 10.3%. That’s right, growth above 10%. By contrast, most other global economies are struggling to reach 3% growth.
In addition, in Japan the BOJ left rates unchanged at .1%, citing forecasts that growth will slow as fiscal stimulus is removed worldwide, thereby affecting global demand.
Across the pond, both the Euro and Pound are trading higher vs. the Dollar as dollar weakness due to continued positive corporate earnings led by JP Morgan are reducing demand for the greenback. In addition, better than expected demand for a Spanish debt issue and lack of bad news has buoyed the Euro to 1.285.
The Aussie and the Kiwi are also lower this morning, as fears of a Chinese slowdown reduce expectations for exports. However, 10% growth still looks pretty good to me.
Lastly, the Fed statement yesterday here in the US showed a commitment to maintain rates for as long as is deemed necessary. This is reducing demand for the Dollar ahead of US PPI and CPI figures which are due out today and tomorrow respectively.
In the forex market:
Aussie (AUD): The Aussie is lower on fears that a Chinese slowdown may soften demand for Australian commodities, despite the fact that demand for safe haven currencies has subsided.
Kiwi (NZD): The Kiwi is also lower for the same reason as the Aussie; however the NZ manufacturing index expanded at a faster than expected pace. Tomorrow NZ will report CPI data which will show whether inflation is tame or not and may influence the market’s expectation of a rate hike.
Loonie (CAD): The Loonie is lower on concerns about demand for commodities, despite the fact that oil is trading marginally higher. The BOC rate decision is due out next Wednesday, which may bring a rate hike should policy makers fear that inflation may come in higher.
Euro (EUR): The Euro is higher across the board, as the lack of bad news has emboldened traders as a series of successful debt auctions have provided confidence to the marketplace. In addition, the ECB maintained that interest rates are appropriate and they expect to see moderate growth.
Pound (GBP): The Pound is also mostly higher this morning and reached a high of 1.537 vs. USD as Chancellor Osborne said he does not expect banks to need additional support and cited austerity measures as a main reason. However, the BOE has still maintained a dovish outlook for future policy.
Dollar (USD): The Dollar is lower today as PPI figures came in at -.5% vs. an expectation of -.1%. This shows that prices are declining faster and may, in conjunction with tomorrow’s CPI data, show that deflation is firmly in hand. Initial jobless claims came in less than expected, with 429K new claims vs. an expectation of 450K. Corporate earnings have been good so far, but may not be enough to hold up stocks as the futures are giving back earlier gains.
Yen (JPY): The Yen is surprisingly strong this morning as it looks like US data may be moving the market toward risk-aversion. The BOJ policy meeting still showed a cautious outlook and recent Yen strength could pose a threat to Japanese exports, the leading driver of economic growth.
While Chinese growth may be “slowing”, it is hard to argue that 10% is nothing short of remarkable. However, when one considers that it is Chinese growth that is driving the world economy right now, there is concern that a lack of global demand could cause further reductions.
In the US, it looks like deflation is winning the battle as the government’s attempts to maintain higher prices may have been misguided. While deflation is a problem, let’s consider for a moment that Japan has been experiencing it for the last 20 years.
While I am hoping that policy-makers can avoid a Japan-style economic malaise, I have my doubts currently. The government is just about out of magic bullets to help maintain prices as interest rates cannot get much lower.
The problem with the economy right now is not that there is a lack of demand, but rather an over-supply of homes, goods, and services. As the economy reached the asset bubble that became known as the Great Recession, government policy to attempt to keep prices high only served to help bank balance sheets. While this may have prevented a total collapse of the financial system (still up for debate), now is the time to pursue pro-business policies that will help bring new money to the US economy to increase demand as supply clears.
On the plus side, at least it was “only” 429K losing jobs last time, it could have been much worse. So let’s just hope that China will continue to grow, as it looks like the US may be done for a while. Dollar weakness is evidence of this.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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Hungry for Risk!
By Mike Conlon | July 6, 2010
After last week’s sell-off in world markets, investors are feeling more confident about economic prospects as the US markets return from the holiday weekend. Bank stress tests in Europe are intended to show transparency, and EU leaders are “banking on” hopes that the balance sheets are not as bad as previously thought.
Overnight, the RBA left interest rates unchanged in Australia, but signs that inflation (particularly home prices) may be rising is giving the Aussie a boost this morning.
World stock markets are higher this morning, as stock earnings season is almost upon us. There is a common notion that stocks may offer the best chance for growth despite the fact that world economies are putting on the brakes and trying to curb spending.
There is no major news on tap for the US in this shortened week, but we’ll get GDP figures from the Euro zone, as well as the UK rate decision on Thursday.
In the forex market:
Aussie (AUD): The Aussie is higher on risk-taking despite the fact that the RBA left interest rates unchanged. The RBA did say that consumer spending and business investment are expanding, and they may be in the middle of a housing bubble due to housing shortages. This could foreshadow further rate hikes to come.
Kiwi (NZD): The Kiwi is also higher as risk appetite is back to start the week, despite the fact that business confidence figures have fallen as domestic demand slowed. Nevertheless, the market is betting that the next rate hikes will come from New Zealand, as they attempt to thwart inflation. However, the RBNZ has been cautious as economic growth and inflation may not accelerate as quickly as expected.
Loonie (CAD): The Loonie is also higher as oil prices are higher for the first time in 6 days as risk appetite is returning to the market. Canada’s employment report on Friday will show whether or not the economy is improving, but speculators have pared back expectations of a rate hike at the next policy meeting.
Euro (EUR): The Euro is also higher as comments from various officials regarding the bank stress tests have allayed market fears—for now. EU GDP figures are due out tomorrow, with CPI figures to follow on Friday. The market is expecting tepid growth despite the austerity measures various governments are undertaking to get deficits under control.
Pound (GBP): The Pound is mixed this morning trading lower vs. the risk currencies but higher against USD and Yen. The UK rate policy decision is due on Thursday, and no change is expected. The market is still reacting favorably to the UK budget cuts, however only time will tell if the economy is strong enough to support such measures.
Dollar (USD): The Dollar is mostly lower this morning (but up against Yen) in a week that is light on news out of the US. Comments from various Fed officials will likely be insignificant, and US stock earnings season kicks off next week.
Yen (JPY): The Yen is lower this morning on a classic risk-taking day as carry traders look to re-establish positions. Japanese stocks rallied overnight as a rally in Chinese stocks gave the market direction.
Most of the news that the market has received lately has been negative, yet so far the markets have been behaving resiliently. With not much news on the docket this week, the market will have time to adjust to the notion that we may be seeing slower, but steadier growth.
Next week will kick off earnings of US companies, and they are likely to be positive despite the economic slowdown. Right now, there is uncertainty as to where is the best place for investors to park their money, with fixed income investments paying little to no interest.
That is one of the reasons why the currency market has become one of the fastest growing markets for investors, as it provides alternate opportunities and a chance to benefit from global economic conditions.
Investors have been reaping the benefits that the currency market has provided for some time; isn’t time you join them? There is no time like the present; and if world economic conditions continue to behave as they have recently, the currency market should continue to flourish.
There is always a bull market somewhere in currencies; the trick is knowing where!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Dependence Day?
By Mike Conlon | July 2, 2010
Going into this Fourth of July weekend, I can’t help but think about the state of the US economy and how we have become so dependent on government to fix society’s ills. This morning, the US Non-Farm Payrolls report came out and it showed that we had an overall jobs decline of 125K, but an increase in private sector hiring to 83K, which was better than last month but less than expectations. In addition, the unemployment rate fell to 9.5%, but this was more a function of people leaving the work force than economic and jobs growth.
Part of the reason we see these distorted numbers is because of the decline of census workers, but private sector job growth has been tepid at best. This is all a function of the current economic climate in Washington DC, and government policy which businesses deem as uncertain. Without private sector growth, the economy could be in danger of sliding into double dip recession.
In other news, PPI figures in Europe came in as expected, and Moody’s ratings agency re-affirmed the UK’s AAA rating.
In the forex market:
Aussie (AUD): The Aussie has been volatile and is now higher as the market reacts to the NFP number. In addition, the PM is backing away from the mining tax as Australia prepares for a potential economic slowdown.
Kiwi (NZD): The Kiwi is also higher on risk taking, and is the best performer this morning as New Zealand is seen as potentially the next to raise interest rates.
Loonie (CAD): The Loonie is lower as traders are paring back speculation that Canada will raise rates this month. Tepid Canadian GDP figures in addition to the potential US economic slowdown could affect the Canadian economy as the US is the largest importer of Canadian goods. Also to note is that oil is trading lower to roughly 72.50.
Euro (EUR): The Euro is higher against all but the Kiwi, as continued confidence that the banking situation may not be as bad as expected is gaining traction. In addition, the market is speaking loud and clear that it favors the EU plan of economic austerity to the US plan of spend, extend, and pretend. In addition, Euro zone unemployment came in slightly better than expected at 10%, and PPI figures came in higher at 3.1%, showing that wholesale inflation is the highest it’s been in 19 months. However, don’t expect the ECB to move on rates anytime soon.
Pound (GBP): The pound is higher as Moody’s reaffirmed the UK’s AAA rating citing the deficit reduction plan as positive.
Dollar (USD): The Dollar is mostly lower, as economic prospects in the US are diminishing. Until we get policy that will encourage business and not harm it, we are going to have high unemployment for some time. Now that unemployment benefits have not been extended, more people will have to get off of the dole and get a job, even if it’s far less than they desired. This potential political backlash could cost the incumbent party in November if the economy continues to worsen.
Yen (JPY): The Yen is lower on risk appetite as the market is deeming the NFP number “acceptable”, as the worst-case scenario fears were averted.
There really is no other way to say other than the US is on the wrong path and the continued spend, extend, and pretend policies of this administration are going to harm the US for some time.
Whether you believe in the free markets or not is of no consequence; as no one can deny that private business is the largest employer of workers. If you create a hostile environment for business, they’re not going to hire. Period.
Go ahead and raise taxes on business, they’ll move elsewhere thereby removing even more jobs. Anyone who believes that higher taxes aren’t coming down the pike lives in fantasy land. With out of control spending taking place on a daily basis, this isn’t going to end well.
I hate to write this so close to July 4th, the day on which our forefathers said ‘no more’ to the unfair policies that were imposed upon them. However, it seems cruelly ironic that as our forefathers roll over in their graves; their successors are trying to emulate the same policies that they rejected 234 years ago.
So Happy 4th of July to all…. as this may be one of the last truly Independence days if we continue down this path. By the time the dust settles, we may be saying, “Happy Dependence Day” as we all line up for our government checks and government cheese.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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Moderate Growth Ahead!
By Mike Conlon | June 24, 2010
Yesterday’s FOMC meeting came and went as expected, and Bernanke acknowledged that the pace of growth is going to be moderate going forward, backing off from last meeting’s stance that recovery was accelerating. Bernanke cited European debt conditions as being not supportive of growth, and of course he left interest rates unchanged as expected and kept the “extended period” language.
In addition to the FOMC news, US new home sales tanked and were off 33%, confirming the previous day’s data that the housing market is getting worse and not better.
Concerns over Greek debt are heating up as the cost to insure said debt is at an all-time high. Outside of general feelings about the global economy, I’m not certain what has changed in Greece to cause this rise.
What this adds up to is risk-aversion in the market, and Japanese yen and the Swiss Franc are benefiting.
Overnight, New Zealand released GDP that showed growth for a fourth straight quarter and matched analyst expectations. The Kiwi is lower, as the market may have been expecting a bigger number and had pushed the Kiwi too high, too fast.
So there’s no real earth-shattering news in the market today, but rather an overall feeling that economic conditions may be worsening and not getting better.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion, but overnight a political coup took place where the Prime Minister Rudd stepped down after losing support of his colleagues. Julia Gillard became Australia’s first female Prime Minister as Rudd lost public opinion largely in part to the proposed mining tax he wanted to impose. Mining is a cash-cow for Australia, and this move was seen as anti-business.
Kiwi (NZD): The Kiwi is lower this morning despite the prospect of another rate hike in July as a result of seeing its fourth straight quarter of growth. The market was hoping the GDP figure would beat analyst expectations, but it “merely” came in as expected at .6%. The Kiwi was the biggest gainer yesterday, so this is a case of market anticipation falling flat. Nevertheless, this is still positive for the Kiwi.
Loonie (CAD): The Loonie is lower this morning as well, taking its cues from oil prices which have “retreated” to $76 and overall risk aversion in the market due to the notion that the pace of global economic recovery may be slowing.
Euro (EUR): Concerns over European debt are heating up as European stocks fall for the third day in a row. Perhaps the market is expecting the US to lead us to recovery, and yesterday’s FOMC statement made it pretty clear that may not be the case. I can’t see anything specific that would lead me to believe that anything today is different than last week. Then again, I don’t have insight into the inner-workings of European banks. The Swiss franc has been seeing massive inflows of capital as investors move out of the Euro, and it’s gotten to the point where it may be financially untenable for the SNB to try to intervene again.
Pound (GBP): The pound is higher against all but Yen, as the market “needs” somewhere to park its capital. This is a vote of confidence for the UK budget plans and BOE policy statement which show that the UK may be in the best position to tackle their debt and see growth at the same time. The Pound is back to 1.5 vs. USD.
Dollar (USD): Oh the dollar. It’s catching a bid from risk-aversion, but it’s clearly no beauty-prize winner either. Yesterday’s FOMC meeting and new home sales figures all but take a rate hike off the table for 2010. This morning, jobless claims are lower than the previous week, but still in ridiculously bad territory. Durable goods orders rose ex-transportation, but overall they shrank, though less than expected. Bottom line: the US economy is still weak. Until policies are instituted that will incent companies to create jobs, our slide into Japan-style stagflation is imminent.
Yen (JPY): The Yen is higher across the board on risk-aversion. Japanese stocks are lower as concerns over Europe may hurt Japanese exports, which have been driving economic recovery.
Unfortunately for the world, the US still rules the roost. We started the economic crisis, and now we’re pro-longing it. Yet bad behavior has been replaced by bad policy; and we are slowly sliding into the economic abyss as politicians compete for the next vote.
Meanwhile, banks have been bailed out, executives have paid themselves enormous bonuses, and they sit on the money and don’t lend for fear that regulatory and other economic factors will make it a losing proposition. Or they can’t lend, because they have too many toxic assets sitting on their books and are anticipating the next wave of deflation that will put more home-borrowers under water.
The “solution” to the housing crisis was the tax credit, and it’s just been reported that 14,000 unscrupulous folks bilked the government out of some $25 million, including 240 death row inmates. Government efficiency at its finest! What’s a few million anyway? We’re TRILLIONS in the hole already, and we’ll just keep spending.
Oh yeah, but at least we’re not the EU! Have treasury put that on the dollar bill!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Yuan Gone!
By Mike Conlon | June 21, 2010
In a move that the market was anticipating and hoping for, the Chinese government announced that they would loosen the peg on its currency and allowing it to float more freely. This hopefully will allow for greater balance in the global economy and help China curb inflation.
However, expectations for Yuan gains fall anywhere in the 3-5% range, as any appreciation will be gradual. This news sent stocks and commodities higher, as this is seen as a vote of confidence by the Chinese. But there is still much work to be done, as China needs to increase domestic demand to support balanced growth.
China has always been the “X factor” in the forex marketplace, as their currency peg and government intervention have created imbalances and uncertainties and have essentially impacted every financial market. There has been increasing pressure on China to make this move, and perhaps recent dollar strength vs. the Euro has encouraged this change.
So this news is very welcome by the markets, and risk appetite is the theme of the morning. Oil is higher this morning to $78.25 and gold reached a 1260 handle earlier. The commodity currencies are higher as a stronger Yuan will increase Chinese purchasing power.
This week is pretty light for news, with the FOMC meeting and the UK budget report due out ahead of this weekend’s G-20 meeting. The timing of the Chinese announcement is somewhat conspicuous, as it was expected that Yuan valuation was to be a major topic of discussion.
In the forex market:
Aussie (AUD): The Aussie is higher on risk appetite, as the Chinese news has the market betting that Australia will be a major beneficiary of a stronger Yuan. There’s no real news for the Aussie this week, so expect it to trade on risk themes this week.
Kiwi (NZD): The Kiwi is higher for the same reasons as the Aussie, though we are going to get some economic data from NZ this week. The current account balance and GDP figures are due out mid-week, which should reveal how the economy is faring and what the RBNZ may be thinking with regard to interest rates.
Loonie (CAD): The Loonie is moving closer to parity with USD, as higher oil prices and risk-taking are drivers behind gains. There is data due out from Canada this week, with CPI and retail sales figures expected to show the state of the economy. In addition, Canada hosts the G-20 meeting this weekend.
Euro (EUR): The Euro is lower this morning against all but Japanese yen, as potential benefits from the Chinese news is out-weighed by the austerity measures to be enacted to deal with the debt crisis. European banks have agreed to publish the results of bank stress tests in July, which may or may not be a good thing.
Pound (GBP): The Pound is mixed this morning trading lower vs. the commodity currencies and USD but higher vs. Euro and Yen. This comes in advance of the emergency budget report due out tomorrow, which is causing increased volatility as the “fear factor” of measures to be enacted leaves the market both hopeful and concerned.
Dollar (USD): The Dollar is lower on risk taking, as equity futures are up big time this morning and stocks are going to open higher. This week’s FOMC meeting is expected to yield no change, but GDP data due out on Friday with other data could tell a different story.
Yen (JPY): Yen is trading lower as selling in order to buy higher yielding assets is taking place. In addition, the Nikkei was up some 2.5%. The Yuan news is widely expected to be positive for Asian countries as a stronger Yuan should benefit other Pac-Rim exports.
I cannot underscore how big this news out of China is. The market has been begging for this for some time to help re-balance the global economy. However, the actual effect of this announcement and how it will play out is highly uncertain.
While it is widely expected that the Yuan will appreciate, I’m hearing rumblings that some analysts thing it could depreciate because of Euro zone issues. While I think this is highly unlikely, the Yuan has been gaining ground as dollar strength due to the Euro debt crisis has lifted its relative value higher.
In addition, the timing of this announcement ahead of the G-20 meeting has bought China time and shifted the focus of the meeting back onto Europe. How and when this actually occurs remains to be seen.
But this could end up being a case of “be careful what you wish for”, as unexpected outcomes could cause market uncertainty and increased volatility. So don’t break out the Champagne just yet; as this move is both necessary and desired, but still a long way away from fixing the global economy.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Who’s Next?
By Mike Conlon | June 16, 2010
Greece Forgotten, Spain Next?
You knew it had to be too good to be true. The Euro had been on a multi-day climb higher and had shaken off news of the Greek credit downgrade. So the mood yesterday was that all is well and that somehow this Euro zone debt crisis was magically resolved.
Not so fast, folks! Rumors are floating around that Spain may be the next domino to fall into crisis mode, as denials of an emergency credit line sent the Euro lower. Meanwhile, inflation in the Euro zone was higher, but in-line with expectations.
Contributing to risk in the market is news that housing starts here in the US came in way lower than expected and building permits declined to a one-year low. In addition, PPI figures showed a decline in a sign that deflation may be a bigger worry than inflation.
In the UK, a decline in jobless claims was a positive.
So this morning starts out in risk-aversion mode, with Yen and Dollar strength, and commodity currency weakness.
In the forex market:
Aussie (AUD): The Aussie is lower on risk-aversion as it is giving back some recent gains. The Westpac index of leading economic indicators fell to its weakest pace in nearly 10 months after building starts slowed more than expected. This is indicative of a slowing pace of growth in Australia, which isn’t necessarily a bad thing.
Kiwi (NZD): I moving the Kiwi back to the second position in my “risk ladder” as an improved outlook for the economy and potential rate hikes make the Kiwi a more desirable destination than the Loonie. Consumer confidence in NZ increased as a decline in the jobless rate boosted optimism. This could induce greater consumer spending which has been a weak spot for the economy.
Loonie (CAD): Oil is lower this morning taking the Loonie with it as risk-aversion is prevalent to start the day. There is a report out that Russia could be looking to buy Loonies in order to diversify away from the Euro, and the swaps market is indicating an increasing bet that Canada will continue to raise interest rates.
Euro (EUR): The Euro is mixed this morning, trading higher against the commodity currencies but lower against the rest in a classic pattern of risk-aversion. Much of the fear in the market is coming from the Euro zone, as rumors that Spain is in trouble have been lingering. Consumer prices came in as expected, showing that inflation rose 1.6%, well within the Euro zone target range of 2%.
Pound (GBP): The Pound is also falling in line on the risk hierarchy and showing mixed results today. Consumer confidence figures came in lower than expected, but so did jobless claims providing a silver lining that the jobs picture may be improving in the UK.
Dollar (USD): The Dollar is higher on risk aversion this morning, but may give back some of those gains as its own weakness is factored into the market. Housing starts fell 10% as the government homebuyer tax credit expires and building permits which are a sign of the future declined as well. Meanwhile, PPI figures showed a decline, but not as much as expectations. The saving grace today for the stock market may be the industrial production figures which rose 1.2% vs. an expectation of .9%. This is causing a pullback in Dollar gains, and may be the catalyst needed to flip from risk-aversion to risk-appetite. Stay tuned.
Yen (JPY): The Yen is showing the most strength today as risk-aversion is causing an un-wind of carry trades.
The market started out in risk aversion mode, but appears to be giving back as some of the fear in the market abates. As of right now, there is no news from Spain but many will tell you that where there’s smoke, there’s fire.
News here in the US was mixed, and it will be interesting to see if good manufacturing numbers can offset bad housing start numbers. The stock market is lower at this point but investors have not been discouraged as of late. And while oil prices are lower this morning, yesterday they reached just under $77 which is a recent high.
I would not be surprised to see a reversal today, as US market participants shake off the Spain rumor and continue to push prices higher. The decline in building permits should not have come as a surprise, as the removal of housing stimulus was bound to have negative effects.
So take your clues from stocks today, and trade what you see and not what you think you know!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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Getting Better!
By Mike Conlon | June 14, 2010
Global recovery appears to be gaining traction, as regions around the globe are reporting increases in economic data consistent with growth. As we’ve made it through another weekend without any European debt landmines exploding, the market is in risk-taking mode this morning.
Industrial production figures in the Euro zone came in better than expected driving world stock markets higher. Oil prices are back to the $75 level as improved outlooks for recovery are beginning to take hold.
Japan started it monetary policy meeting this week, and are expected to announce no change to its interest rate tomorrow.
Global financial regulation is now at the forefront as governments around the globe consider how to best tackle the financial markets and the mistakes of the past.
This is a light week for news, but we’ll get some CPI data from both the UK and the US which should give an indication of where we stand with regard to inflation.
In the forex market:
Aussie (AUD): The Aussie is higher on increased risk appetite as the lack of potential Euro zone related negative news has pushed world stock markets higher. Minutes from the RBA policy meeting will be released tomorrow, which should provide an inside view as to future rate policy. Expect the Aussie to trade on risk themes as there is a lack of news expected from down under this week.
Loonie (CAD): The Loonie is also higher on risk-taking getting a bid from increased oil prices which is back trading above the $75 level. The Loonie is heading back toward parity with USD, trading at its highest levels in nearly a month to 1.0275 vs. the Dollar.
Kiwi (NZD): The Kiwi is also higher on risk-taking despite the fact that retail sales figures came in showing a decline of .3%, which was slightly worse than expected. Nevertheless, the RBNZ is expected to continue to raise rates throughout the year. However, RBNZ honcho Bollard said that a higher Kiwi is not helping the NZ trade balance. The Kiwi has gained roughly 7.5% on the Dollar in the past year.
Euro (EUR): The Euro is higher to 1.225 vs. USD this morning as another weekend free of negative news has buoyed the common currency higher. Industrial production figures came in much better than expected, increasing .8% vs. an expectation of .5%. As I’ve mentioned time and time again, a lower Euro is going to be good for Euro zone exports provided they can shore up their banking system and prevent the debt crisis from getting worse. This still poses the largest risk and impediment to world economic recovery.
Pound (GBP): The pound is on the move higher this morning on risk appetite as the market is increasing its bets that a UK rate hike may be forthcoming sooner than later. The CBI came out with a report predicting faster economic growth and a narrower than expected budget deficit which may spur inflation causing the BOE to raise rates. British CPI figures are due out tomorrow which could push the Pound higher if inflation is viewed as gaining. Jobless claims are due out on Wednesday.
Dollar (USD): The Dollar is lower on risk appetite, as traders are seeking yield and abandoning the safe haven currency. PPI figures are due out on Wednesday, followed by CPI figures on Thursday.
Yen (JPY): The Yen is lower on risk appetite as carry trades are re-established after a non-eventful weekend in the Euro zone. A familiar pattern is developing, where traders take risk off before the weekend and then re-establish carry trades if there is no further bad news. In addition, Japanese stocks are higher as manufacturers said that the business climate has improved paving the way for further business spending to expand upon the already-flourishing export led recovery.
The number one driver of fear in the markets is the debt situation in the Euro zone. As a reader of this blog, this should come as no surprise to you. Every day that goes by without a major issue is one in which the markets will gain confidence in recovery.
We are seeing some good signs of global growth; however all of this can be derailed with one negative report from the Euro zone. The debt crisis has not gone away and the Euro zone banking system is still very fragile. Economic numbers should improve as a lower Euro will be good for business in the region.
Meanwhile, the economic data will continue to pour in. Low interest rates around the globe may need to rise if inflation starts to heat up. Debt reduction plans and reduced spending must be balanced with sound monetary policy. Central bankers walk a fine line between trying to encourage economic growth and reducing deficits.
But for now, the market appears to be content with this balance today. So ride the wave but be prepared to bail at the first sign of trouble!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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